Bargaining power of buyers: drivers and pricing
The bargaining power of buyers is how much power customers have over your prices. What drives buyer power, real examples, and what it means for how you price.
The bargaining power of buyers is how much power your customers have to push your prices down, or to demand more for the same price. It is one of Porter's five forces. When buyer power is high, the value your product creates flows to your customers instead of to you.
Porter splits it into two questions worth keeping apart: do buyers have the clout to negotiate, and do they care enough about price to use it?
What drives the bargaining power of buyers
Negotiating clout comes from four sources, according to Porter's 2008 Harvard Business Review article:
| Driver | What it looks like |
|---|---|
| Few buyers, or buyers purchasing large volumes | One client is 40% of your agency's revenue |
| Standardised products | Buyers believe any vendor will do, so they play you off against each other |
| Low switching costs | Moving to a rival takes an afternoon |
| A credible threat to do it themselves | A client could hire an in-house team and stop buying |
Price sensitivity decides whether buyers turn that clout on your price. They push hardest when:
- your product is a large share of their costs or budget;
- they are under profit pressure themselves;
- your product barely affects the quality of what they sell;
- your product does not save them money elsewhere.
The reverse is the useful part. Porter's example is film studios renting production cameras: the equipment shapes the quality of the film, so they pay limited attention to price. The more your product changes your customer's result, the less they haggle.
Porter notes that most of this applies to consumers as well. They are more price sensitive when products are undifferentiated, expensive relative to their income, and low stakes if they underperform.
Examples of buyer power
Supermarkets and their suppliers. The UK's largest grocers are so much bigger than most of the producers they buy from that Parliament created a regulator for the relationship. The Groceries Code Adjudicator, set up in 2013, enforces the Groceries Supply Code of Practice between the largest grocery retailers and their direct suppliers. That is buyer power at its most extreme.
Drinks companies and packaging makers. Porter's example of backward integration: soft drink and beer producers have long held down packaging suppliers' power by threatening to make packaging themselves, and at times doing it.
An agency with one big client. Hypothetical but common. When one account is 40% of revenue, that client sets the price at every renewal, whether or not anyone says so.
Shoppers with comparison sites. One shopper has no clout. Millions sorting by price do, which is why standardised products sold online drift towards the same price.
What buyer power means for pricing
Treat list price as a ceiling where buyer power is high. Plan for the discount. If buyers routinely negotiate 15% off, a list price set without that in mind is fiction.
Price differently for different buyer groups. Porter points out that customer groups differ in bargaining power. A small business that needs onboarding has less clout than a large one with a procurement team. Tiers, minimum terms and service levels let you charge each group what its position allows.
Sell the result, not the input. Buyers who see your product changing their outcome care less about price. Specific proof, such as a before and after number from a similar customer, moves you out of the "share of my costs" column and into the "quality of my product" one.
Raise switching costs by adding value, not friction. Integrations, saved history and learned workflows make leaving costly in a way customers accept. Hidden exit fees do the same job and earn resentment. More on this in switching costs.
Avoid customer concentration. No pricing tactic survives a single customer who can walk away with half your revenue.
How to gauge buyer power in your market
Porter's advice is to quantify where you can, rather than list qualitative factors. Five numbers you can get:
- Share of revenue from your top five customers. Above half, buyer power is high whatever else is true.
- Realised price against list price. The average discount you actually give, taken from invoices.
- How often price is the first objection. Ask sales to tag it for a month.
- Price mentions in reviews. Count reviews of you and your rivals that mention price, "expensive" or "cheaper". A category where reviews talk about price more than results is a buyer's market.
- How rivals present prices. Visible prices, price-match promises and permanent discount banners on competitors' pricing pages all suggest buyers are comparing hard.
Common mistakes
Confusing effect with cause. Porter lists this as a pitfall. Price sensitivity is the effect; the buyer's economics (their margins, your share of their costs, what your product does for them) are the cause. Work on the cause.
Treating every customer as one group. An average hides the segments where you could charge more.
Cutting list price for the loudest negotiator. Give a targeted concession if you must. A list price cut hands every buyer the discount only one asked for.
Buyer power is the mirror image of the bargaining power of suppliers, where you are the buyer. The remaining forces are the threat of new entrants, the threat of substitutes and competitive rivalry.
Questions people ask
Do consumers have bargaining power?
Individually very little, collectively a lot. One shopper cannot negotiate with a supermarket, but millions of shoppers comparing prices online push sellers of standardised products towards the same price.
How can a small business reduce buyer power?
Serve more, smaller customers so no single one matters too much, differentiate so you are not interchangeable, and sell on the result your product produces rather than its cost. Each one weakens a different driver.
Is buyer power the same as customer loyalty?
No. Loyal customers can still have strong bargaining power if they buy in volume and know alternatives exist. Loyalty lowers the chance they leave; it does not stop them asking for a discount.
Is high buyer power always bad for a business?
For margins, yes. But a few demanding buyers can also push you to improve quality and efficiency faster than easy customers would, as long as no single buyer is large enough to dictate terms.
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